Investing for a Child's or Grandchild's College

Radio Transcript, 2 minutes 55 seconds, for use during week of March 10.

Description: Penny and Susan discuss investing for college

Announcer: Invest Wisely comes to you from Iowa State University Extension through a grant from the Investor Protection trust, providing investor education on the web at: investorprotection.org.

Susan: Penny, one of my goals is helping my granddaughter pay for college. 

Penny: That’s a good goal, Susan.  How old is your granddaughter now?

Susan: She’s just turned 6. 

Penny: The younger your granddaughter is and, thus, the farther from college, the more risk you can take in your investments.  At this stage, with college still over ten years away, you might consider investing money in stock and stock mutual funds.

Susan: Aren’t stocks going down right now?

Penny: You can expect that the stock market will decrease some years, like it’s doing now, but historically stocks have earned more than other investment categories so it can be a good investment depending on your goals and your timeline.

Susan: As my granddaughter gets older and it’s closer to the time she’ll actually attend college, what kinds of changes should I make to my investments?

Penny: When you have fewer than five years until your granddaughter will be making her first tuition payment, you’ll want to reduce your risk by gradually moving your money from stocks to less-risky investments.

Susan: So the next few years, I should include stocks or stock mutual funds as I save toward my granddaughter’s college tuition. 

Penny: Then, as your granddaughter enters her teens, you should begin shifting over to bonds, certificates of deposit, or money market accounts.

Susan: In addition to thinking about where to invest, should I also be thinking about taxes on the earnings from these investments?

Penny: There are custodial accounts, known as Uniform Transfers to Minors Act or Uniform Gifts to Minors Acts accounts, where you would invest in your granddaughter’s name.  There are also Coverdell Education Savings Accounts and 529 savings plans, which are offered by most states.  Each of these have advantages for you and your granddaughter and can impact the taxes you pay.

Susan: Thank you, Penny.  I’m going to take a look at my current investments and see what adjustments I can make toward this goal.  I’d like to come back and visit with you in more detail about the Uniform Gifts to Minors accounts, Coverdell  accounts, and 529 savings plans, particularly about their tax implications.
Penny: That sounds great, Susan.  And remember, for more information visit the ISU Extension website at extension.iastate.edu and look for ‘Invest Wisely.’